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Britain to lead rise in interest rates

The Bank of England is expected to become the world’s first major central bank to raise interest rates during the current cycle as global economic recovery gathers pace.

04 Nov 2003 05:34 GMT

UK economy, driven by London, grew twice as fast as predicted

Just one month ago few analysts were predicting that the first interest rate rise by the British central bank since February 2000 would come as early as November.

But records published earlier this month showing that almost half of British monetary policymakers wanted a rate increase at their 9 October meeting, sent economists scurrying for their erasers.

Many economists now expect the Bank of England’s monetary policy committee to increase the main official lending rate by 25 basis points on Thursday from a 48-year low of 3.5%.

Great expectations

Expectations of a rate raise had already been kindled by a sharp upward revision to official figures last month showing that the British economy grew twice as fast as previously thought in the first half of the year.

The British economy continued to recover in the third quarter, when growth held steady at 0.6% on a quarterly basis, according to official figures.

Analysts say others may be in no hurry to follow suit.

Whether this expected rate increase by the Bank of England proves to be the start of many “depends on the sustainability of the global recovery and whether the consumers' appetite for debt cools,” said HSBC economist John Butler.

Many economists now expect the Bank of England’s monetary policy committee to increase the main official lending rate by 25 basis points on Thursday from a 48-year low of 3.5%.

“We expect rates to rise to 4.0% by February and remain there for the rest of 2004.”

A rate increase in Britain next week will be the first by a major central bank since the start of a concerted monetary policy easing around the globe in 2000 to try to breathe life back into the flagging world economies.

Hesitation

But central banks in other major economies could be slow to follow suit, say experts.

The US Federal Reserve last week vowed to hold interest rates at a 45-year low of 1.0% for a “considerable period”.

Although US government figurers showed on Friday that the world’s biggest economy grew at a blistering annual pace of 7.2% in the third quarter, the Fed is still expected to hold fire for a few more months at least.

The European Central Bank is tipped to peg its main interest rate at 2.0 percent on Thursday and for some months to come. Some economists say a rate cut looks more likely than a hike at the moment in the sluggish euro zone.

“Unless the third quarter growth is repeated over the next couple of quarters in America we believe that the Fed isn’t going to tighten policy until the back end of next year,” said Philip Shaw, economist at Investec Securities.

“The strength of the euro will continue to choke off export growth,” he said. The prospect of an interest rate rise any time soon in Japan, where the central bank is battling deflation with near-zero short term interest rates, is “completely off the cards,” said Shaw.